Tim Hortons Penn Station. Associated Press/Mary Altaffer
David Friend reporst in The Canadian Press that coffee giant Tim Hortons Inc. (TSX:THI) pulled up its sales and profits in the latest quarter as it overcame aggressive promotions from competitors, but the company’s CEO warned that the price of a double-double and doughnut could be increasing in some parts of the country.
Chief executive Don Schroeder said Thursday that price increases could be implemented in certain regions to offset cost pressures from both higher food prices and rising minimum wages.
However, he emphasized that executives didn’t have any immediate plans to boost prices, nor were there any further details on which areas of Canada would be affected.
“We meet with the regional pricing committees right across the country on an ongoing basis,” he said in an interview.
The committee considers numerous factors before deciding to raise prices, including the company’s internal costs for products, as well as how the economy is affecting its customers, he added.
Schroeder said Tim Hortons knows its consumers are particularly conscious of any prices changes on their products, and tries to minimize them whenever possible.
“It’s not uncommon for a customer to come in, and they’ve got the exact change in their hand for their large double-double,” he said.
“We always advise our customers in advance when it’s going to happen and give them a couple weeks notice.”
On Thursday, Tim Hortons reported that its net earnings rose to $77.8 million, or 43 cents per share, for the quarter ended June 28. That’s an increase from $75 million, or 41 cents per share, a year earlier.
Quarterly revenue climbed nine per cent to $556.1 million from $510.7 million, with an increase in sales contributing to the improvement in top line performance.
The company, which has come to dominate the Canadian coffee market, reported a 3.3 per cent increase in same-store sales in the United States, a market it has struggled to conquer. Same-store sales refers to sales at locations that have been open for at least a year.
Growth was more modest in Canada at 1.7 per cent, as the company faced a variety of challenges including the economic slowdown – which it said noticeably impacted its customers in manufacturing regions – and heightened promotional campaigns from coffee competitors like McDonald’s and Starbucks.
Schroeder told analysts on a conference call that McDonald’s promotional campaign, which gave away free coffee for a limited time, was hardly noticed at the Canadian coffee chain.
“The fact is that we actually grew transactions over the two weeks of this competitive activity, demonstrating the tremendous loyalty of our customers, and the entrenchment of our competitive position in Canada,” he said.
The minimal impact from the McDonalds campaign was contrary to expectations from several analysts, who had speculated that the international burger chain’s popularity would at least temporarily steal a noticeable chunk of business.
Tim Hortons said system-wide sales increased five per cent in the quarter.
Shares of the company were ahead six per cent to $1.85 to $31.75 in afternoon trading on the Toronto stock market.
Tim Hortons has been pushing forward with a rollout into the northern United States, and last month announced the opening of 12 new stores in New York City, including key tourist spots like Broadway, Times Square and Madison Square Garden.
Schroeder said the company hopes to forge more “strategic alliances and non-traditional outlets” like the one it has made with the Riese Organization, operator of the New York City locations.
“We’re going to continue to develop new stores in our existing markets and expand from there into our adjoining markets,” he said.
“We are very pleased with the level of sales that have been retained” in New York City, he added, declining to offer specific sales numbers.
CIBC analyst Perry Caicco said in a note that overall results were close to expectations, with revenue coming in higher than expected.
The earnings were “a bit soft on Canadian sales, but U.S. was reasonable,” he wrote.
Research Capital Corp. analyst Robert Cavallo said the quarterly results were solid, but warned that the company needs to be cautious when increasing its prices.
“They’re still in a very precarious position where the consumer is being cautious where they’re spending,” he said.
“Any drastic type of price increase may not be received very well.”
In its outlook, Tim Hortons said it expects to meet its same-store sales growth of three to five per cent for the year in Canada, and may exceed its target of zero per cent to two per cent in the United States.
Overall, it expects operating income growth of six to eight per cent for the year, when factoring in asset impairment charges and other restaurant closure costs for the fourth quarter.
